DCIT, Circle-13(1), New Delhi V. Jarul Infrastructure Pvt. Ltd, New Delhi

ITA 3514/DEL/2019

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 4204 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 2 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-06-2022
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: G
• Assessment Year: 2012-2013
• Appeal Filed On: 22-04-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Capital receipt; Commercial expediency
• Section: 68; 271(1)(c); 43; 13; 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH, ‘H’: NEW DELHI BEFORE SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER AND SHRI ANUBHAV SHARMA, JUDICIAL MEMBER ITA No.3514/DEL/2019 [Assessment Year: 2012-13] DCIT, Circle-13(1), Central Revenue Building, I.P. Estate, New Delhi-110002 Vs M/s Jarul Infrastructure Pvt. Ltd. 60, 2 nd Floor, Vasant Marg, Vasant Vihar, New Delhi-110057 PAN-AAACJ4483D Revenue Assessee Revenue by Sh. Praveen Rawal, CIT-DR Assessee by Sh. Ajay Wadhwa, Adv. And Ms. Ragini Handa, CA Date of Hearing 06.06.2022 Date of Pronouncement 23.06.2022 ORDER PER SHAMIM YAHYA, AM, This appeal by the Revenue is directed against the order of the Ld. CIT(A)-36, New Delhi, dated 31.01.2019 pertaining to Assessment Year 2012-13. 2. Grounds of appeal reads as under:- “1. That the order of the Ld.CIT(A) is erroneous & contrary to facts & law. 2. Whether CIT(A) has erred in facts and in law in deleting the disallowance of short term capital loss of Rs.76,12,50,000/- aroused on the forfeiture of share warrant money, without considering the fact that the entire transaction is nothing but a colourable device adopted for evasion of tax by the assessee company.” 3. Brief facts of the case are that the assessee company is engaged in the business of purchasing, selling, developing, constructing, 2 ITA NO.3514/DEL/2019 M/s Jarul Infrastructure Pvt. Ltd. hiring or otherwise acquire and deal in all real or personal estate properties. The Assessing Officer noted that as per computation of income, the assessee company has shown business loss of Rs.29,690/- and short term capital loss of Rs.76,12,50,000/-. With regard to the transaction resulting in short term capital loss, the note 20 of the note to financial statement for the year ended 31.03.2012 read as under:- “During the previous period ended 31.03.2011, the company had paid Rs. 76,12,50,000/- as upfront amount for part payment against 10,50,00,000/- warrants of Indiabulls Power Ltd. (IPL) which, if exercised, would have entitled the Company to an equal number of equity shares of IPL fully paid up of the face value of Rs. 2 each, anytime after November 30, 2010 but no later than May 29, 2012, in accordance with the terms of issue of such warrants. During the year ended 31.03.2012 the company has conveyed its unwillingness to IPL to excise the warrant of IPL per se consequently the upfront amount of Rs. 76,12,50,000/- paid by the company towards part payment against the said warrant was forfeited by IPL and the same was charged to the profit and loss account as loss on share warrants.” 4. The Assessing Officer asked the assessee to explain the Short Term Capital Loss. The assessee submitted as under:- “During the F.Y. 2010-11, Indiabulls Power Ltd. proposed to allot 10,50,00,000/- share warrant to the assessee. which upon conversion, would have entitled the assessee to acquire an equal No. of equity shares of the company of face value of Rs.10/- each at the conversion price of Rs.29/- per shares. As a term of the offer, the assessee was required to pay Rs.7.25 per warrant (25% of conversion price of Rs.29/-) amounting to Rs.76,12,50,000/- as upfront at the time of allotment of share warrant and the balance was payable at the time of exercise of option i.e. within eighteen months from the date of allotment. Considering the market price of share at the time of grant of option and estimating the future profit, the assessee accepted the proposal and paid the upfront 3 ITA NO.3514/DEL/2019 M/s Jarul Infrastructure Pvt. Ltd. money to the company on November 29, 2010. Copy of the bank statement, reflecting the payment of warrant money paid and the copy of share warrant certificate is attached herewith as per annexure. However, in the year under consideration, considering the market conditions and to safeguard its future interest, the assessee opted not to make further payment and accordingly conveyed its unwillingness to Indiabulis Power Ltd. vide letter dated 18.11.2011 Consequently, the amount paid by the assessee was forfeited by IPL and same has been claimed under the head “Capital gain” as short term capital loss.” 5. The Assessing Officer thereafter noted that the assessee company is wholly owned subsidiary of M/s Heliotrope Real Estate Private Limited who hold the entire share capital. The Assessing Officer further noted that the assessee company did not have any income during the year under consideration and earlier year. The Assessing Officer also asked the assessee to furnish the balance sheet and bank statement of M/s Heliotrope Real Estate Private Limited. From the perusal of the financials of this company, the Assessing Officer found that this company has also not earned much revenue. He further noted that from the balance sheet of M/s Heliotrope Real Estate Private Limited, it is found that this company also carried out the activity of borrowing a sum of Rs.76,12,50,000/- and making a further interest free advance to the assessee company. The said company has also borrowed such fund from M/s Jarul Infrastructure Pvt. Ltd. Thereafter, the Assessing Officer noted the following chronology of dates:- Sl. No. Particulars Date 1 Decision of investment 07.10.2010 2 Date of taking loan 29.11.2010 3 Date of investment in share 29.11.2010 4 ITA NO.3514/DEL/2019 M/s Jarul Infrastructure Pvt. Ltd. warrant of IPL 4 Date of Board meeting for unwilling to exercise share warrant of Indiabulls Power Ltd. 17.11.2011 5 Date of letter of unwilling to exercise Share warrant of Inidabulls Power Ltd. 18.11.2011 6. The Assessing Officer referred to the Board resolution dated 17.11.2011 for not exercising the option. The Assessing Officer was of the opinion that the transactions were pre-decided for making investment of Rs.76,12,50,000/- with Indiabull Power Ltd. Thereafter the Assessing Officer referred to warrant certificate and noted that the assessee company was entitled to purchase one equity share of India bulls Power ltd. having face value o Frs.10/- by paying in full the exercise price of Rs.28/- (as reduced by the upfront money of Rs.7.25 per warrant already paid) for each warrant exercised at any time on or after 30.10.2010 but not later than 29.05.2012. The assessee company however chose to forego its right to exercise the convertible warrant well before the end date and wrote a letter to Indiabulls Power Ltd. on 18.11.2011. Hence, Assessing Officer wondered as to what was the pressing need for the assessee company to forgo the option to exercise even before the last day for exercising the same. The Assessing Officer was of the opinion that prima facie there is no justification for this pre-mature decision of the assessee company whereby it has lost a sum of Rs.76,12,50,000/- which was procured from borrowings. The Assessing Officer asked for justification from the assessee and noted following response:- 5 ITA NO.3514/DEL/2019 M/s Jarul Infrastructure Pvt. Ltd. In so far as the word transfer under the Income tax Act, 1961 is concerned, it is defined under section 2(47), which reads as under:- 2(47) ‘transfer’ in relation to a capital asset, includes- (i) (ii) the extinguishment of any right therein; or. Attention of your goodself is invited to the case of CIT vs. Mrs. Grace Collis & Ors 248 ITR 320 (SC) (Copy attached), wherein the Hon’ble Supreme Court had held that restrictive meaning cannot be given to the term extinguishment of rights and the expression does not include the extinguishment of rights in a capital asset independent of and otherwise than on account of transfer. The Court held as under: - We have given careful thought to the definition of "transfer “ in section 2(47) and to the decision of this court in Vanik Silk Mills Pvt. Ltd. case. In our view, the definition clearly contemplates the extinguishment of rights in a capital asset distinct and independent of such extinguishment consequent upon the transfer thereof. We do not approve, respectfully, of the limitation of the expression “extinguishment of any rights therein” such extinguishment on account of transfer or to the view that the expression “extinguishment of any right therein” cannot be extended to mean the extinguishment of rights independent of or otherwise than on account of transfer. To so read the expression is to render it ineffective and its use meaningless. As we read it, therefore, the expression does include the extinguishment of rights in a capital asset independent of and otherwise than on account of transfer”. Considering the law, propounded by the Hon’ble Apex Court, it is submitted that even when right to exercise warrant was extinguished independent of and otherwise than on account of transfer, such extinguishment of right would fall within the ambit of section 2(47) and consequently forfeiture of shares would be allowed as a capital loss. Further, attention of your goodself is invited to the law pronounced by Jurisdictional High Court of Delhi in the case of CIT vs, Shri Chand Ratan Bagri ITA 31/2010 (Copy attached). In the said case, the assessee had subscribed towards 10 lakhs preferential convertible 6 ITA NO.3514/DEL/2019 M/s Jarul Infrastructure Pvt. Ltd. warrants issued by M/s BLB Limited. The assessee after making the initial payment of Rs.59.5 lakhs could not make the balance payment and therefore, M/s BLB Limited forfeited the amount of Rs.59.5 lakhs earlier paid by the assessee. The assessee claimed this loss as short term capital loss under the head “capital gain”. It was submitted on behalf of the assessee that the company had debited loss to its capital account and not to the profit and loss account and consequently, there was no effect on the profit and loss account of the assessee company. The Assessing Officer however, observed that the same had cast an effect on the short term capital gains of the assessee showing and the forfeiture of this arnount in the manner indicated by the assessee was a tax evasion tactic, prohibited by law, Tbie Assessing Officer taxed the same in the hands of the assessee. Citing the contention of the revenue that the right itself came to be extinguished and the asset did not remain, the forfeiture would not amount to a transfer, the High Court observed as under:- “We find that the forfeiture of the convertible warrant has resulted in extinguishment of the right of the assessee to obtain a share in BLB Limited. It is not a case where the asset itself has been extinguished or destroyed. A share in a company is nothing but a share in the ownership of the company. While the right of the assessee to share in the ownership of the company (BLB Limited) stands extinguished on account of the forfeiture, the company, with all its assets, continues to exist. The forfeiture only results in one less shareholder It is not as if the asset in which a share was being claimed was also extinguished. Thus, the second point urged by the Ld. Counsel for the revenue is not tenable”. Further, while relying upon the order of the Hon’ble Apex Court in the case of M/s. Grace Collies and the Hon’ble Karnataka High Court in the case of BPL Sanyo Finance Limited, the Hon’ble High Court has held as under:- “whether the forfeiture of the convertible warrant amounted to a transfer within the meaning of section 2(47) of the said Act has now been made clear by the Supreme Court in the case of Grace Collis (supra) as also by the Karnataka High Court in BPL Sanyo Finance Limited. We agree with the interpretation given by the Karnataka High Court in BPL Sanyo Finance Ltd .(Supra) and we see no reason to take a different view”. 7 ITA NO.3514/DEL/2019 M/s Jarul Infrastructure Pvt. Ltd. Similarly, in case of CIT vs. BPL Sanyo Finance Ltd. 312 ITR 63 (Kar) (Copy attached), Hon’ble Karnataka High Court has observed that the forfeiture of share application money is nothing but the extinguishment of rights and held as under:- “In the case on hand consequent to the assessee’s default in not paying the balance of money on allotment, its right in the shares stood extinguished on its forfeiture by the Investee Company. The loss suffered by the assessee, i.e. non-recovery of share application money is consequent to the forfeiture of its right in the share and the same is to be understood to be within the scope and ambit of transfer. In this view of the matter, the Tribunal was justified in holding that it would amount to short term capital loss to the assessee.” “With regard to the extinguishment of any rights, we may profitably refer to the judgment of the Supreme Court in the case of Commissioner of Income-tax vs. M/s. Grace Collis and Others”. Considering the legal position emerging from the above discussions, it is clear that the forfeiture of share warrant money is nothing but transfer and hence, the amount of loss incurred is duly allowable as short term capital loss.” 7. The Assessing Officer observed that he has carefully considered the same and the case laws are distinguishable without pointing out the reasons. He observed that this is not genuine transaction and the transactions are coloured in the nature to pass on the amount in question to Indiabulls Power Ltd. in disguise of the convertible warrants. The Assessing Officer enquired from the assessee that why the share warrants were not sold. The Assessing Officer noted the assessee’s response in this regard is as under:- “During the financial year 2010-11, Indiabulls Power Ltd. proposed to allot 105,000,000 share warrant to the assessee, which upon conversion, would have entitled the assessee to acquire an expel no of equity shares of the company of face value of Rs. 10/- each at a conversion price 8 ITA NO.3514/DEL/2019 M/s Jarul Infrastructure Pvt. Ltd. of Rs. 29/- per share. As a term of the offer, the assessee was required to Pay Rs. 7.25/- per warrant (25% of conversion price of Rs. 29/-) amounting to Rs. 76,12,50,000/- as upfront at the time of allotment of share warrant and the balance was payable at the time of exercise of option i.e. within eighteen months from the date of allotment. Considering the market price of share at the time of grant of option and estimating the future profit, the assessee accepted the proposal and paid the upfront money to the company on November 29, 2010. Copy of bank statement, reflecting the payment of warrant money paid and the copy of share warrant certificate is attached herewith as per annexure. However, in the year under consideration, considering the market conditions and to safeguard its future interest, the assessee opted not to make further payment and accordingly conveyed its unwillingness to Indiabulls Power Ltd. vide letter dated 18.11.2011 (copy attached). Consequently the amount paid by the assessee was forfeited by IPL and same has been claimed under the head “Capital Gain” as short term capital loss. Assessee further informed during the course of assessment proceedings that these share warrant were not transferable and hence could not be sold. As per aforesaid submission of the assessee, the share warrants were not transferable hence could not be sold. However, there is no reason as to why the assessee has not waited till the end date i.e. 29.05.2012 for exercising the option since there was no liability of payment of interest on the borrowed fund.” 8. However, the Assessing Officer was not satisfied. He noted that the company M/s Heliotrope Real Estate Private Limited has borrowed this amount from Chloris Properties Ltd. He found that Chloris Properties Ltd. has advanced a sum of Rs.304,50,000/- till 31.03.2011 which has been shown as other loans and advances. He further noted that M/s Chloris Properties Ltd. obtained the funds from the Indiabulls Infrastructure Ltd.. He noted that M/s Chloris Properties Ltd. received a sum of Rs.304,50,000/- from Indiabulls Infrastructure Ltd. which has 9 ITA NO.3514/DEL/2019 M/s Jarul Infrastructure Pvt. Ltd. been further given to four persons. He noted that the money has been utilized for investment in convertible share warrants of Indiabulls Power Ltd. has actually come from Indiabulls Infrastructure Ltd. He further observed as under:- “7.1. It would be further interesting to see the allotment of total 42 crore convertible warrants by Indibulls Power Ltd. Following is the table which shows that name of allottee, number of warrants allotted and amount: Name of the allottee Number of warrants Total amount @ Rs.7.25 per warrant Azalea Infrastructure Pvt. Ltd. 15,00,00,000 Rs.108,75,00,000 Gloxinia Infrastructure Pvt. Ltd. 6,00,00,000 Rs.43,50,00,000 Jarul Infrastructure Pvt. Ltd. 10,50,00,000 Rs.76,12,50,000 Alona Infrastructure Pvt. Ltd. 10,50,00,000 Rs.76,12,50,000 Total 42,00,00,000 Rs.304,50,00,000 Thus, the entire amount of Rs.304.50 crores borrowed by Chloris Properties Ltd. from Indiabulls Infrastructure Ltd. has actually been invested in 42 crores convertible shares warrants of Indiabulls Power Ltd.” 9. Thereafter, the Assessing Officer mentioned that the Board of the assessee company might have analyzed the prices of the shares of Indiabulls Power Ltd. before making a decision for purchase of share of this company @ Rs.29/- per share during the period from 30.11.2010 but not later than 29.05.2012 which the assessee company was entitled by making investment in 10,50,00,000 convertible share warrants of Indiabulls Power Ltd. @ 7.25/- per warrant. Thereafter, the Assessing Officer examined the share prices of Indiabulls Power Ltd. which was said to be downloaded from the website of Bombay Stock Exchange. He 10 ITA NO.3514/DEL/2019 M/s Jarul Infrastructure Pvt. Ltd. noted that the value of per share has not crossed the benchmark of Rs.29/- for which the assessee has made this investment. It is only few occasions when the highest quoted price of share has crossed Rs.29/- per share. That itself shows that the decision to invest in 10.50 crores convertible warrants of Indiabulls Power Ltd. was never guided as a prudent investment and there was something else for which, the investment has been made. This also the highest price per share of M/s Indibulls Power Ltd. on 19.11.2010 was Rs.28 while the assessee company made the investment @ 29/-. This shows that the assessee company has actually been a conduit for passing this sum ultimately to Indibulls Power Ltd. through this sham transaction. The Assessing Officer referre to assessee’s response in this regard, which reads as under:- “It is humbly submitted that Jarul Infrastructure Pvt. Ltd. took Inter Corporate Deposit from M/s Heliotrope Real Estate Private Limited, which in turn took funds from Chloris Properties Limited. Confirmation from M/s Heliotrope Real Estate Private Limited and bank statement has already been submitted and bank statement and confirmation from chloris has been attached in this submission. All companies are duly filing their income tax return and all such outstanding are appearing in the audited accounts of all the companies. Merely because the company has suffered long term capital loss it cannot be presumed to be a sham transaction.” 10. However, the Assessing Officer was not satisfied. He referred to the decision of the Hon’ble Supreme Court in the case of Sumati Dayal vs CIT (214 ITR 801)(SC) and CIT vs Durga Prasad More and held that apparent is not true actually, a colourable device and the entire amount is transferred to Indiabulls Power Ltd. as capital receipt. Thereafter, the 11 ITA NO.3514/DEL/2019 M/s Jarul Infrastructure Pvt. Ltd. AO referred to bond results of Rattan India Power Ltd. and observed as under:- “It is interesting to note that the entire investment of Rs.304.50 crores has been forfeited by Rattan India Power Ltd. on a single day i.e. 30.11.2010 thereby forfeiting the entire amount invested by all the four companies. As if all the four companies have simultaneously decided to not to exercise the option of conversion before 30.11.2010 even though they were entitled to exercise its option till 29.05.2012. M/s Indiabulls Power Ltd. (Now Rattan India Power Ltd.) has also by a single resolution dated 19.11.2011 forfeited the entire amount of Rs.305.50 crores and has shown as a capital receipt.” 11. Hence, the Assessing Officer held that the entire transaction is actually a conduit for transfer of the amount to credit the amount as a capital receipt in the books of Indiabulls Power Ltd. (Now RattanIndia Power Ltd.) The Assessing Officer referred to the decision of the Hon’ble Supreme Court in the case of McDowell and Co. Limited vs CIT 154 ITR 148 (SC) and other decision in this regard and concluded as under:- “It has also been observed that; ‘‘Tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges”. 8.1 In the instant case also, a colourable device has been created to camouflage the credit of the amount to Indiabulls Power Ltd. (now RattanIndia Power Ltd.) as a capital receipt to avoid the test of section 68 of the Income tax Act, 1961. The assessee company alorg with its holding company acted as an operator & conduit to the transaction to provide ultimate benefit to Indiabulls Power Ltd. (now RattanIndia Power Ltd.) who has shown this amount of Rs. 304.50 crores as a capital receipt and thus avoid taxation on this sum. 12 ITA NO.3514/DEL/2019 M/s Jarul Infrastructure Pvt. Ltd. Thus, considering all facts of the case as analyzed in foregoing paras, the transaction is treated as a sham transaction and the short term capital loss of Rs. 76,12,50,0001- claimed by assessee is rejected. Penalty proceedings U/s 271(1)(c) of the Income Tax Act, 1961 for concealment of income as aforesaid and furnishing inaccurate particulars within ther meaning of explanation 1 to the sub-section (1) of the section 271(1)(c) of the Income Tax Act, 1961 are initiated. In view of the above discussion, the total income of the assessee is computed as under: Loss as declared by the assessee 76,12,79,690 Add: (as discussed above) 1. Disallowance on account of capital gain 76,12,50,000 Total loss 29,690 Assessed at loss of Rs. 29,690/-. The assessee is not allowed to carry forward the short term capital loss of Rs. 76,12,50,000/- for future year adjustment.” 12. Against the above order, the assessee preferred appeal before the Ld. CIT(A). The Ld. CIT(A) elaborately noted all the submission of the assessee. He summarized the facts of the case are as under:- 4.2.3.1. The appellant had filed its return of income for AY 2012- 13, declaring a total loss of Rs. 76,12,79,690/-. The appellant is engaged in the business of purchasing, selling, developing, constructing, hiring or otherwise acquire and deal in all real or personal estate/ properties either directly or through group companies, and construct, acquire hold/ sell properties, buildings and acts as real estate agent and all other related and ancillary objects. The AR has submitted that during FY 2010-11, Indiabulls Power Limited ("IPL") proposed to allot 42,00,00,000 convertible (non- transferrabie) warrants representing equal number of equity shares of IPL having face value of Rs, 10 per share at a conversion price of Rs. 29 per share. As per the terms of allotment, an upfront payment of 25% of conversion price i.e. Rs. 7.25 per share was required to be made by allottees and the balance was payable at the time of exercise of option i.e. within eighteen months from the date of allotment. The above mentioned convertible warrants were issued by IPL tothe following 4 allottees: 13 ITA NO.3514/DEL/2019 M/s Jarul Infrastructure Pvt. Ltd. Name of the allottee Number of warrants Total amount paid upfront @ Rs.7.25 per warrant (Amount in Rs.) Azalea Infrastructure Pvt. Ltd. 15,00,00,000 Rs.108,75,00,000 Gloxinia Infrastructure Pvt. Ltd. 6,00,00,000 Rs.43,50,00,000 Jarul Infrastructure Pvt. Ltd. 10,50,00,000 Rs.76,12,50,000 Alona Infrastructure Pvt. Ltd. 10,50,00,000 Rs.76,12,50,000 The appellant company along with 3 other companies invested in the share warrants at a lock in price of Rs.29 per share on 29.11.2010. The facts of the case as submitted by the AR of the appellant is that in F.Y.2010-11 Indiabulls Power Limited (“IPL”) proposed to allot 105,000,000 share warrants to the appellant which upon conversion would have entitled the appellant to acquire an equal number of equity shares of IPL of face value of Rs.10/- each at a- conversion price of Rs. 29/- per share. According to the terms of the offer, the appellant was required to pay Rs. 7.25/- per warrant (25% of conversion price of Rs. 29/-) amounting to Rs. 76,12,50,000/- as upfront at the time of allotment of share warrant and the balance was payable at the time of exercise of option i.e. within eighteen months from the date of allotment.” 13. Thereafter, he noted the submissions of the assessee’s counsel and held as under:- “4.2.3.5. From a perusal of aforesaid judicial pronouncements and facts of the Appellant's case, it is evident that the appellant submitted entire evidence and explanations for the investment in IPL and subsequent forfeiture by IPL. Hence, the appellant had discharged its initial onus and burden to prove the transaction. Thereafter, it was the duty of the AO to verify the same or else bring on record any evidence to contradict the same. Based on a perusal of the assessment order, it is evident that the AO has not brought on record any evidence to contradict the explanations offered by the appellant. In fact the findings of the AO are in line with the explanations offered by the appellant. Moreover, at every stage, the appellant has also submitted rationale along with information available on the public domain to prove the reasons for investment in 14 ITA NO.3514/DEL/2019 M/s Jarul Infrastructure Pvt. Ltd. convertible share warrants, the trading history of the shares of IPL, the subsequent events of merger and demerger of group companies, and trading pattern of IPL's shares pursuant to investment to substantiate its decision to not proceed with any further investment in the share warrants thereby resulting in forfeiture of the warrants. The appellant has also explained in earlier parts of this submission that as per provisions of section 2(47) of the Act, the forfeiture of share warrants representing a right in IPL’s ownership represents extinguishment of asset (being the right), such forfeiture results in transfer u/s 2(47) of the Act, thereby resulting in short term capital loss in the hands of the appellant. AO In the assessment order, the AO disallowed the short term capital loss of Rs. 76,12,50,000/- claimed by the appellant by treating the transaction as a sham transaction. In the assessment order, the AO has observed that the investment by appellant into I'PL and consequent forfeiture was a colourable device used by the appellant to camouflage the credit of amount to IPL as a capital receipt to avoid the test of section 68 of the Act; the appellant company acted as a conduit to the transaction to provide ultimate benefit to IPL; since the appellant company did not wait till end of conversion period to convey unwillingness, the said forfeiture was pre-decided; even if the appellant company did not want to invest further in the shares of IPL, then the unwillingness should have been expressed in May 2812 instead of November 2011; the forfeiture of warrants by IPL does not amount to transfer as per provisions of section 2(47) of the Act. The AO disallowed the short term capital loss of Rs. 76,12,50,000 claimed by the appellant. In addition to the appellant's submissions, the AR has also submitted the order of Ld. CIT(A)-1, who has allowed the short term capital loss claimed by Alona Azalea Infrastructure Pvt. Ltd, (AIPL), as AIPL was one of the allottees of the convertible warrants, and similar to the case of the appellant, AIPL's warrants were also forfeited resulting in capital loss. The shares of IPL having face value of Rs. 10 each were traded at prices ranging from Rs. 29.60 to Rs. 45.50 and were expected to increase in the near future, Thus, at such point in time, the appellant along with 3 other companies had invested in the convertible share warrants of IPL by way of making 25% part payment, wherein the balance payment was due upon conversion at any time in the next 18 months. The facts of the case have been considered and the submissions filed by the AR of the appellant have been perused. The Assessment order has 15 ITA NO.3514/DEL/2019 M/s Jarul Infrastructure Pvt. Ltd. been considered. All case laws cited by the AO and tine Appellant have been considered. The order of Ld. CIT(A) 1, on similar facts has been perused. The relevant para of the order is reproduced below: Considering the facts of the case, it cannot be said that the appellant has used any colourable device to get the share warrants forfeited. The decision was taken by the appellant with the intention to earn money but such ad decision has gone wrong and to cut the further losses the appellant decided not to pay the further amount. Therefore, the disallowance of short term loss of the appellant as alleged by the Assessing Officer in para 4.6 and 5.1 of the assessment order is untenable and same is deleted. As the facts are identical, maintaining judicial discipline and respectfully following the decisions of Ld. CIT(A)-01 the appeal is allowed. The appeal on ground no.1 is allowed.” 14. Against this order revenue has filed appeal before us. learned departmental representative relied upon the orders of the assessing officer. He submitted that assessing officer has given the finding that assessee has adopted a colourable device and hence the claim of loss has been rightly disallowed. 15. In the joinder learned counsel of the assessee submitted that assessing officer has tried to sit into the shoes of a businessman and decide what is prudent. He submitted that this is not at all legally sustainable. He submitted that all the necessary details were available before the assessing officer. He did not find any fault therein. On the basis of conjectures and surmises he had made the disallowance. He submitted that on identical facts in case of another company M/s Azalea Infrastructure Pvt. Ltd. which has also similarly contributed to Indiabulls Power Ltd. and has suffered similar loss the claim was duly allowed by 16 ITA NO.3514/DEL/2019 M/s Jarul Infrastructure Pvt. Ltd. the ITAT. Hence, he submitted that the issue is in fact covered by the ITAT decision on similar facts. Furthermore learned counsel of the assessee summarised in submission as under:- 1. Justification with regard to decision of investment and decision of mot exercising: Share Price Trend: i. Oct 2009 to Nov 2010: At the time of investment i.e. on 30.11.2010, share Price of IPL (listed on NSE and BSE) in last 12 months was ranging from Rs. 45.5 per share to Rs. 29.6 - refer page 15-19 of assessment order where the Ld. AO has specifically given a table showing historical data of share prices of IPL downloaded from website of BSE and page 1,5,11 of Annexure 1 showing data downloaded from website of NSE The same was expected to rise in future due to ongoing projects and future ready investments of IPL and the trading history -refer 108,113,135,156 of PBK Therefore, it was a prudent decision to invest in IPL ii. Dec 2010-Nov 2011; -The share price fell from Rs. 29.6 to Rs. 11.8 - refer pg 16,17 of assessment order and page 12,17, 22 of Annexure 1 showing data downloaded from website of NSE iii. 17th October 2011; Merger and demerger of group companies vide order of Delhi High Court dated 17.10.11 effective from 25.11.11- as per the said scheme, the warrants issued to the Assessee had to be compulsorily converted into partly paid shares of IPL and shareholders were liable to pay 1% of balance amount i.e. Rs. 2.28 cr within 2 days from effective date of scheme i.e. latest by 27th November 2011 - refer HC order at page 237.266. 270 of PBK and AFS of IPL at page 95.100.101 of PBK iv. 18th November 2011: price of shares of IPL fell to Rs. 10 per share-refer page 23 of Annexure 1 showing data downloaded from website of NSE and pg 17 of assessment order v. In fact, even on 27th November 2011 : i.e. the due date as per scheme, the share price was Rs. 10.1/ share and even on 29th May 12: i.e. the last date for exercising, the 17 ITA NO.3514/DEL/2019 M/s Jarul Infrastructure Pvt. Ltd. share price was Rs. 12.10/ share - refer page 24,25 of Annexure 1 showing data downloaded from website of NSE and pg 17 of assessment order vi. Even today i.e. on 3 June 2022 the share price is Rs. 4.2/- per share- refer page 26 of Annexure 1 showing data downloaded from website of NSE vii. Additional immediate outflow and additional outflow after 6 months: The Assessee would have had to pay Rs. 2.28 crores immediately i.e. on 27th November 2011 -refer High Court Order dated 17 October 2011 at page 237,266,270 of PBK and would have had to pay balance Rs. 226 crores in May 2012 that too when the price of one share was Rs. 10. viii. The falling share prices with no expectation of price to rise, immediate financial outflow of Rs. 2.28 crores due to the directions of the Hon’ble High Court in November 2011 and balance amount of Rs. 225 crores to be paid in next 6 months i.e. in May 2012 was the reason the Assessee decided to not exercise the option and conveyed its decision on 18.11.11 to IPL. Hence, decision was only prudent and rational and in accordance with economic indicators and market trends. 2. Prices are not controlled or manipulated by Assessee: IPL is a listed and publicly traded company on NSE and BSE and its prices are available on public domain. The Assessee has no control over its price of shares .-refer page 114,214,225,237 of PBK and page 15 of assessment order 3. Shares were non transferrable and could not have been sold in open market to recover its money-refer para 6.2 at page 12 of assessment order 4. Exercising the option would have resulted in greater loss and no rational person would have exercised the option: Shares in open market were available for Rs. 10 per share then why would the Assessee pay balance amount of Rs. 21.75 per share. Assessee also submitted before the Ld. AO the computation of loss if option would have been exercised-refer page 43 ofPBK 5. STCL not set off - No benefit obtained: Such STCL not set off against any CG and remains outstanding. Hence, no benefit is derived-refer return of Income of Assessee for AY 2020-21at Annexure 2. 6. No restriction on obtaining loam from Holding Company: .There is no legal restriction on obtaining a loan 18 ITA NO.3514/DEL/2019 M/s Jarul Infrastructure Pvt. Ltd. from Holding Company to make investment in promoter companies. 7. No restriction on timing of investment; There is no restriction on timing of investment. It is for parent company to decide whether they would like to keep substantial idle funds in the account of its subsidiary or to infuse funds only when the same are required to be invested in IPL. Assessee has no control over their fund management. Given the analogy suggested by the Ld. AO, it appears that Ld. AO is trying to suggest that in case the funds had stayed for a longer period in the bank Account of Assessee then this investment would have been genuine otherwise this investment would be termed as bogus. 8. AO cannot step into the arm chair of a business man: The investment was the decision of the Assessee and its promoters. Such management decisions are the essence of commercial expediency of business undertakings and cannot be questioned. It is not the domain of the AO to allege whether any decision was right or wrong, as the same is undertaken after due consideration by a business undertaking for the overall benefit of the business. Thus, commercial expediency should be judged from the point of view of businessman and not the taxing Department. The Hon'ble Apex Court has held that the income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. Even the Hon'ble jurisdictional High Court has held that revenue cannot justifiably claim to put itself in the armchair of a businessman or in the position of the board of directors and assume the said role to decide how much is a reasonable expenditure having regard to the circumstances of the case-refer case law summary 9. Full disclosure- all transaction were through bank; source of investment and source of source was also established i. Bank statements of Assessee showing receipt and transfer of funds on 29.11.2010 at page 45 of PBK ii. Bank statements of Heliotrope Real Estate Pvt. Ltd showing receipt and transfer of funds on 29.11.2010 at page 68A of PBK 19 ITA NO.3514/DEL/2019 M/s Jarul Infrastructure Pvt. Ltd. iii. Bank statements of Chloris Properties Ltd showing receipt and transfer of funds on 29.11.2010 at page 86 of PBK iv. Confirmation dated 1st January 2014 by Chloris Properties Ltd in respect of amount lent to Heliotrope Real Estate Pvt. Ltd -Pg 84 of PBK; v. Confirmation dated 20th March 2014 by Heliotrope Real Estate Pvt. Ltd in respect of amount lent to Assessee -Pg 36 of PBK, vi. Audited Financials of Assessee - Refer note 5,9,10,20,21 at pages 5,9,10,11,12,13 of PBK vii. Audited financials of IPL for AY 2012-13-refer page 92,94,95,99,100,101,108,113,114,121,123,126,132,133,135 viii. Audited Financials of IPL for AY 2011-12 - refer page 142,144,156,167,168,179 of PBK ix. Audited Financials of Heliotrope Real Estate Pvt. Ltd - refer note 6,8,10,22 at page 58,63,64,67 of PBK x. Audited Financials of Chloris Properties Limited -refer note 3and 23 at page 74,78,81,82 of PBK xi. Board Resolutions dated 7th October 2010 of Assessee regarding the investment -refer page 54 of PBK xii. Board Resolution dated 17th November 2011 of Assessee regarding decision to not exercise the option of conversion and regarding forfeiting the upfront money -refer page 55 of PBK xiii. Board Resolutions of IPL dated 19th November 10 regarding issue of share warrants and their terms and conditions. Provisions of Income tax Act, Companies Act, article of association, memorandum of association, listing agreement, SEBI and approvals, sanctions, permissions, consent of BOD and other authorities were complied with- refer page 189-191 of PBK xiv. Board Resolutions of IPL dated 30th November 2010 regarding allotment of 42 crores share warrants which shall upon conversion be locked in for a period as stipulated under SEBI; xv. Share Warrant certificate dated 30th November 2010 - refer pg 47 of PBK 20 ITA NO.3514/DEL/2019 M/s Jarul Infrastructure Pvt. Ltd. xvi. Communication to IPL vide letter dated 18th November 2011 regarding decision to not exercise the conversion at page 48 of PBK xvii. These companies are filing returns, have made due disclosure in their books. 10. Disallowance on Conjectures and surmises : There was no independent inquiry by the Ld. AO to verify the reasons and justification given by Assessee, he has placed no objection to the evidence given by the Assessee. He has disallowed the claim on the ground that the transaction was sham as it was structured only to evade tax. There is no whisper or any allegation that the amount invested in the forfeited shares has come back to the Assessee in any form. The forfeiture is not claimed to be bogus nor has if been shown to be a fraud or colourable devise. The observation that such transactions are to be treated as sham transaction are mere allegations and bereft of any merits and no cogent material to substantiate this allegation is on record. 11. Forfeiture of call monies/ share warrants/ loss on sale of shares bv group company The following propositions have been held by the Hon'ble Apex Court and the Jurisdictional High Court in various decisions wherein there is forfeiture of share warrants/ call money by a group company-re/er case law summary • No prudent businessmen would permit loss of capital under normal circumstances and it is only under unavoidable circumstances that a person lets go or permits forfeiture of his capital; • If forfeiture is not claimed to be bogus nor it has been shown to be a fraud or colourable devise then the disallowance cannot be made; • That there has to be a positive finding as to how the transaction is to be termed as a colourable device or a fraudulent transaction. No disallowance can be made on surmises and conjunctures, there has to be a finding to the effect that a colourable device was conceived by the assessee to defraud the revenue; the observation that such transactions are to be treated as sham transaction are mere allegations and bereft of any merits: and no cogent material to substantiate this allegation is on record. • It is for the holder of the shares and not for the revenue to decide when to sell the shares held by it; 21 ITA NO.3514/DEL/2019 M/s Jarul Infrastructure Pvt. Ltd. • There is no provision in the Act which would prevent the assessee from selling loss-making shares; • If the sale of shares was not illegal, it could have been made to any one, including a group company and it was immaterial that the purpose of sale of shares was to reduce the outstanding liabilities of the assessee. It was also absolutely immaterial that the liabilities of the assessee were towards group companies. Similarly, it was also immaterial that the shares sold by the assessee were of another group company. It was also immaterial as to who was the purchaser of the shares, so long as the shares were not sold at a price..wh.ich_w.as higher or lower than their fair price and there was no restriction on sale of such sha res to a group company. • Neither the assessee nor the amalgamated company adjusted the capital loss on account of sale of those shares against any long-term capital gain. No tax benefit was, therefore, obtained by the assesse. Hence, it could not be said that the transactions in question were a colourable device, meant to gain some unfair tax advantage. 12. Decision in case of other promoter companies vyho invested in share warrants of IPL. Infact, the warrants were issued by IPL to 4 promoter companies including Azalea Infrastructure Pvt. Ltd. and Alona Infrastructure Pvt. Ltd. In all the 4 cases, the upfront money was forfeited. The Hon’ble Delhi Tribunal has deleted the addition in case of DCIT v. Azalea Infrastructure Pvt. Ltd ITA No. 3667/Del/2017 ITAT DELHI and the Ld. CIT(A) has deleted the addition in case of Alona Infrastructure Pvt. Ltd. vide order dated 22.12.15 AppeaL No. 465/14- 15 -refer case law paperbook 13. Forfeiture pf convertible warrant amounts tp 3 transfer within meaning of section 2f47) of the act as there is extinguishment of a right and loss on their forfeiture is allowable as capital loss A per section clause 47 of section 2 of the Act, transfer includes the extinguishment of any right. The section is reproduced below: “2. (47) transfer, in relation to a capital asset, includes,— ................. (ii) the extinguishment of any rights therein; or 22 ITA NO.3514/DEL/2019 M/s Jarul Infrastructure Pvt. Ltd. ................” The following propositions have been held by the Hon'ble Apex Court and the Hon’ble Jurisdictional High Court-refer case law summary • It is not necessary that for a capital gain to arise there must be sale of a capital asset. Sale is only one of the modes of transfer envisaged by section 2(47). Relinquishment of the asset or the extinguishment of any right in it, which may not amount to sale, can also be considered as a transfer and any profit or gain which arises from the transfer of a capital asset is liable to be taxed under section 45; • Forfeiture of convertible warrant had resulted in extinguishment of the right of the assessee to obtain a share. It was not a case where the asset itself had been extinguished or destroyed. The assessee entitled to claim capital loss; • loss suffered by the assessee, i.e., non-recovery of share application money was consequent to the forfeiture of its right in the shares and the same was to be understood to be within the scope and ambit of transfer. Loss would amount to short- term capital loss to the assessee; • The definition of 'transfer' in section 2(47) clearly contemplates the extinguishment of rights in a capital asset distinct and independent of such extinguishment consequent upon the transfer thereof Conclusion: It is therefore prayed that the disallowance be deleted.” 16. We have carefully considered the submissions and perused the records. We find that in this case assessee company has suffered short-term capital loss which arose out of forfeiture of share warrant money. It is not the case of the assessing officer that the legal claim of short-term capital loss arising out of forfeiture of share warrant money is not legally sustainable. Rather assessing officer in the beginning has questioned the wisdom of assessee is investing. For this he has referred to the share price movement of the investing company. Despite noting that prices were touching Rs.28, he found Rs.29 investment a wrong 23 ITA NO.3514/DEL/2019 M/s Jarul Infrastructure Pvt. Ltd. decision. His inference in this regard is not correct as the price movement by no stretch of imagination point out that investment was in a bogus or penny stock company. Further, it is settled law that Assessing Officer cannot sit in the shoes of businessman and decides the prudence of business decision. Thereafter Assessing Officer has wondered why instead of getting the share warrants forfeited assessee did not sell these shares. It was informed that as per the agreement there was no clause of selling the shares. As subsequent movement in prices have duly corroborated that the share prices fell and the assessee’s decision not to pay the balance amount was not at all unjustified. The prime emphasis of the assessing officer at the end is that the exercise was meant to bring capital receipt in the hands of Indiabulls Power Pvt. Ltd. and thwart examination from the perspective of section 68. This line of reasoning is wholly unsustainable. Firstly assessing officer is not at all seized with the assessment of Indiabulls Power Pvt. Ltd. as to how the capital receipt in his hand is to be examined from the perspective of section 68. Morevoer, even if assessee had contributed the balance amount that would still be a capital contribution. Moreover, even for exempt capital receipt, there is no law that such credits are outside purview of section 68. Hence, Assessing Officer’s surmise also is without any basis whatsoever. Moreover, the amendment in section 68 providing for examination of source of source for share application money, share capital, and share premium, or any such amount was brought in by Finance Act, 2012 w.e.f. 01.04.2013 is not applicable in this case. 24 ITA NO.3514/DEL/2019 M/s Jarul Infrastructure Pvt. Ltd. 17. Hence the premise of the assessing officer the entire exercise was meant to provide capital receipt in the hands of the said company cannot at all be sustained. Even otherwise, since all the details of the flow of funds was before the assessing officer he has not been able to point out as to which stage and in what respect ingredients of section 68 are not cogently satisfied. There is no mention as to whether the identity is not available, or that the source of funds is not given, or that Assessing Officer has unearthed some other transactions. Hence the assessing officer’s order is only based upon surmises and conjecture and hence it is not sustainable in law. Moreover, we note that in identical circumstances, this ITAT in the case of DCIT vs Azalea Infrastructure Pvt. Ltd. vide order dated 28/01/2021 had allowed the claim of short term capital loss. 18. Thus, the crux of the issue for taxation in the hands of the assessee in this case is whether the forfeiture of the convertible warrant amount to a transfer within the meaning of section 2(47). The ITAT in the case of M/s Azalea Infrastructure Pvt. Ltd. (supra) has answered this by concluding as under:- “9. So far as the issue for taxation in the hands of the assessee is squarely covered in favour of the assessee by the decision of honourable Delhi High Court in 329 ITR 356 in case of CIT versus Chand Ratan Bagri, wherein the addition was made in the hands of the assessee on protective basis and the addition was made on substantive basis in the hands of the company who forfeited the shares. In paragraph number 2 there was also an allegation of tax evasion tactic prohibited by law employed by the assessee. It is also the allegation in the impugned case. In paragraph number 12 - 14 clearly clinches the issue in favour of the 25 ITA NO.3514/DEL/2019 M/s Jarul Infrastructure Pvt. Ltd. assessee. The honourable High Court held that the issue as to whether the forfeiture of the convertible warrant amount to a transfer within the meaning of Section 2 (47) of the said act has now been made clear by the Supreme Court in the case of Grace Collis (supra) as also by the Karnataka High Court in BPLSanyo finance Ltd (supra) and the honourable High Court also followed the same. In paragraph number 14 the honourable High Court held that forfeiture of the convertible warrant has resulted in extinguishment of the right of the assessee to obtain a share in the issuer company. 10. In view of this, the ground number 1 of the appeal raised by the learned assessing officer, and so appeal, is dismissed.” 19. Accordingly, in the background of aforesaid discussion and following the Co-ordinate Bench decision in identical case, we uphold the order of Ld. CIT(A). 20. In the result, the Revenue’s appeal is dismissed. Order pronounced in the open court on 23.06.2022. Sd/- Sd/- [ANUBHAV SHARMA] [SHAMIM YAHYA] JUDICIAL MEMBER ACCOUNTANT MEMBER Delhi; Dated: 23.06.2022. f{x~{tÜ? f{x~{tÜ?f{x~{tÜ? f{x~{tÜ? Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi